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Thursday, July 10, 2008

An Open Letter to Congress: Extend renewable energy tax incentives

If you want to know more about the economic, environmental and security benefits from renewable energy development, look no further than my house in Madison, Wisconsin. A crew from a local solar contractor just finished installing a solar electric system that will, when activated, produce about one-half of the electricity used in our household.

Our desire to turn sunshine into electricity at home generated a tidy revenue stream for the installation contractor, Full Spectrum Solar. Most solar installers in Wisconsin are small businesses that provide their employees with a living wage and a good benefits package. If there is any one economic sector that has kept the U.S. economy from turning into a basket case, it is small business.

The kilowatt-hours generated by our panels will spare Madison Gas and Electric (MGE) from having to produce a like amount, mostly from natural gas. Wellhead natural gas prices have doubled in the last 12 months, driving up the cost of serving peak loads on summer afternoons. But that also is when solar systems are generating close to their rated capacity.

Because solar displaces the highest-cost resources on the electric grid, utilities are becoming increasingly receptive to buying back the solar electricity produced by their customers. From MGE’s perspective, our installation couldn’t happen soon enough. The price MGE is willing to pay for our system’s output, 25 cents per kilowatt-hour fixed over a 10-year period, is almost double its standard retail electric rate. MGE’s solar offer is a voluntary initiative underwritten by more than 10,000 customers who purchase utility-supplied renewable electricity for a small premium.

Clearly, both MGE and its customers believe strongly that solar energy is worth investing in today. Not tomorrow, not next week, today.

Indeed, there is no energy source as local as the sunlight striking the roof over your head. Solar energy is as reliable and predictable as the dawn. Fossil fuels are not needed to deliver the sunlight to the Earth’s surface. If solar energy comes with the territory we inhabit, why not use it?

Moreover, sunshine is not depleted when it’s converted into electricity or heat, nor does the conversion process change the chemical content of the atmosphere. Contrast that with carbon-rich fossil fuels. When a primary fuel like coal is converted into electricity, carbon dioxide is created and released into the environment. The carbon content in the atmosphere is now about one-third higher than it was a century ago, when the Automobile Era and the Age of Electricity were in their infancy. Most of that increase is attributable to fossil fuel combustion.

However useful the electricity may have been to its users, its creation resulted in the permanent removal of coal from the Earth’s crust and higher atmospheric concentrations of CO2 that will last throughout the century. Furthermore, the waste energy discharged through automobile tailpipes and utility smokestacks can’t be turned into oil and coal again. We only get one go-round with fossil fuels.

Used judiciously, solar energy in all its manifestations can help America ease off of its unhealthy and financially burdensome dependence on fossil fuels. Moreover, it is inflation-proof, because the sunlight that strikes the panels doesn’t come with a price tag. Compared with other generation sources, solar energy is virtually maintenance-free.

In one fell swoop, expanding renewable energy’s share of the nation’s energy mix would reduce pollution and greenhouse gas emissions, lower the trade deficit, dampen rising fossil fuel prices, employ hundreds of thousands of people in manufacturing and skilled trades, and extend the available life of the world’s remaining nonrenewable resources. Is there a more effective pathway available to re-energize the nation’s slumping economy and sustain it over the long haul? Not as far as I can tell.

As you very well know, federal tax credits have been the principal policy tool for accelerating renewable energy development in this country. Right now, most renewable energy technologies are more expensive than fossil fuels, but the federal incentives level the economic playing field, providing breathing room for solar, wind and biogas to mature and become cost-competitive with more established energy resources. This has been especially true with wind generation, which has expanded from 6,500 megawatts in January 2005 to over 19,000 today. This tripling of windpower capacity in less than four years could not have happened without the production tax credit being in place during that time.

Here in Wisconsin, the renewable energy marketplace has exploded over the last three years, especially in the solar arena. As of this moment, there are 73 full-service solar electric and solar hot water installation firms active in Wisconsin, more than double the installer base in 2005. While a handful have been around before 2000, most are new entrants into this field. The contractor who installed our solar electric system, Full Spectrum Solar, has seen its revenues increase sevenfold since 2005, when it was established with two co-owners and one employee. That was also the year when Congress established the solar investment tax credit. Now Full Spectrum has 12 full-time employees, five of them hired this year.

How critical is the solar tax credit in driving solar’s growth in the United States? If our middle-class household is at all representative of the solar-installing customer base, I can honestly say that the federal incentive was a necessary component to making that investment work for us. Had federal incentives not been available this year, our budget would have been insufficient to absorb the substantial up-front expense that comes with owning a solar energy system.

Indeed, when I compare the flurry of installation activity now with the near-dormant conditions that prevailed just three years ago, it’s clear that the federal tax credit has greatly expanded the size of the domestic solar energy market.

Bear in mind that there are no other federal policies in place to promote renewable energy development and use. While other nations have adopted different mechanisms“CO2 limits, carbon taxes and feed laws, for example—to nurture this sector, renewable energy policy support in the United States begins and ends with tax credits. Allow them to expire and the safety net underneath renewables disappears with it.

The current cycle of tax credits for wind, solar and biogas will expire January 1, 2009, less than six months from now. Considering how important renewable energy has become for our nation’s environmental health and economic well-being, a citizen could be forgiven for thinking that extending renewable energy credits would be something of a no-brainer for Congress. But despite repeated attempts to extend them, Congress has not yet found a legislative formula that clears a path through the forest of interest groups and narrow partisan agendas standing in the way of timely passage.

Anxiety is growing in the renewable energy world that Congress could very well fumble away its remaining chances to adopt the necessary extension language. Should that happen, the momentum built up over the last three years will dissipate next year, and potentially throw the solar, wind and biogas industries into reverse.

This is no idle fear. Congress waited until October 2004 to extend the renewable enegry incentives that expired January 1st that year. The commercial wind industry ground to a virtual standstill that year and didn’t bounce back until the next year. Plans by overseas wind turbine manufacturers to build up a U.S.-based supply chain were put on hold as demand for commercial turbines sagged. Even though the wind industry has been on a roll over the last three-and-a-half years, memories of the 2004 bust continue to inhibit development of a U.S. manufacturing presence.

Should Congress fail to take action this year, the effects will be even more devastating than in 2004. This time around the entire solar industry“installers, equipment manufacturers, and third-party system owners“will experience a taste of what the wind industry went through before. So, too, will those companies—system designers, general constractors, civil construction companies, component manufacturers and environmental consulting firms“that have recently found a protfitable niche in the expanding renewable energy world. The ripple effect from a lapse in federal policy support, however temporary, will be felt by a wider circle of market actors, including utilities.

Extending the renewable energy tax credits would cost U.S. taxpayers somewhere between $3 and $4 billion a year, most of it going to wind generation. Some members of Congress consider that an unacceptably large expense. But these are not permanent incentives. In the case of windpower installations, which have a book life between 20 and 30 years, federal tax credits cover no more than 10 years of operation. After the 10th year, project output is fully taxable.

In my view, this is an underappreciated facet of the tax subsidy argument. Long after the tax credits are exhausted, the wind, solar and biogas installations that were aided by them will still be producing self-replenishing, domestically sourced energy for the owner and/or the grid. Can the same be said for incentives that accelerate the drawdown of our nation’s dwindling supplies of oil and natural gas?

Consider the 33 commercial wind turbines installed Wisconsin in the first half of 1999. Beginning July 2009, their output will be fully subject to federal taxes. These turbines, owned by three different Wisconsin utilities, should generate the same quantity of power in 2010“and 2025“as they did in the year 2000. Seen in that light, the tax break that leveraged the existence of those wind turbines is, if anything, a bargain, one whose benefits to our energy future appreciates over time. Shouldn’t that be a guiding principle in formulating national energy policy?

An annual price tag of $4 billion is peanuts compared with the $1.3 billion that leaves this country each day to slake our nation’s seemingly uncontrollable thirst for petroleum. Here’s another metric for comparing the cost of renewable energy incentives: at current rates of spending, the ongoing occupation of Iraq goes through $4 billion in less than 12 days. And one can argue that the pittance that U.S. taxpayers have contributed thus far to support domestic renewable energy sources has produced far better results in the areas of energy security and economic development than the ongoing occupation of Iraq.

But it’s a telling measure of Beltway cluelessness that our federal lawmakers are more willing to make a show of fiscal discipline on renewable energy policy than on an overseas military operation that now drains about $120 billion a year from the U.S. Treasury.

The U.S. economy is on the ropes, and a lot of unpleasant policy trade-offs lie ahead. As the cost of fossil fuels escalate, and the housing sector and the automobile industry contract further, the U.S. can ill afford to skimp on the one energy pathway that can, with the proper policy support, create jobs by the thousands and convert capital into socially productive and sustainable enterprises. If Congress is truly serious about turning the economy around, reducing the trade deficit, making progress on climate change, and creating a more energy-secure America, it must extend the renewable energy tax incentives, preferably this month. No other action will accomplish so much, or cost so little.